Michael Goldberg is the founder and managing director of Collins St Asset Management. The fund is consistently in the top three performers Australia-wide based on quarterly data collated in the Mercer Investment Survey.

In this Stockhead series, Goldberg provides his unique insights on broader market trends, investment ideas and which sectors the Collins St fund is allocating capital to.

Last month, we discussed two of Collins St’s recent oil & gas investments, both of which have appreciated materially in value since then. In this edition, Goldberg puts the spotlight on five of the fund’s key investment principles – pro tips that any equity investor can apply to improve their results.
 

1. Identify whether you’re looking to invest or speculate

Let me be clear: There’s nothing wrong with speculating, but it’s clearly a different process to investing.

To illustrate, we made a series of investments in ASX uranium stocks back in 2017. That followed an extended period of research where our team arrived at a shared assessment of their intrinsic value.

If you follow the ASX you’d know the sector has been running hot lately.

We were looking at one of our holdings, Paladin Energy (ASX:PDN). It reached 55c, which was around the price that we thought it was worth.

At that point we had to ask ourselves, are we looking to speculate? Or did we invest in this company to achieve an investment outcome?

So, we said you know what? We thought it was worth around 55c. If we stick around now it’s speculation and that’s not really our job. It was time to move on.

Obviously — and you could argue this is always the case! – uranium fever took hold and the stock peaked above $1.

But as an investor you can’t get worried about those sorts of things.

We decided we were making an investment. We achieved what we hoped to achieve, and Paladin looked fully valued based on our understanding of its intrinsic value.

Now that being said, I’d argue there’s a place for speculation in most people’s portfolios — but don’t flick and switch between the two.

If you bought a stock as an investment, it’s an investment. If you bought a stock to speculate, then let it play out with the ups and downs and enjoy the ride.

Be comfortable doing that and understand that there is a difference.
 

2. Before you invest, form a view on what a company is worth

The reason this is so important is that as investors we’re really in control of very little.

In fact, the only thing we’re in control of is the price we’re prepared to pay for a company and the price we’re prepared to sell it for.

So the first question to answer is, what do you think it’s worth?

It helps you avoid the trap of falling in love with a stock, and it ties back to point 1 about investing and speculating.

In other words, if a stock ends up being valued higher than you think it’s worth then it’s no longer an investment.

The only reason to hold thereafter is either because you’re speculating on market sentiment or something coming out of left field.

And that’s actually fine. There are investors who trade solely on technical analysis – analysing the charts, which way the wind is blowing and how much interest a stock has.

Investors have made fortunes that way but it’s not what we do.

For us, when a stock hits the price we think it’s worth – its intrinsic value – we typically look to sell it.

How does one define intrinsic value?

With the Paladin example I cited earlier, our primary driver for that business was a discounted cashflow (DCF) model.

For our recent investment in Beach Energy (ASX:BPT), we looked at its enterprise value (EV) to barrels of oil equivalent (production), compared to the industry standard.

So depending on the business you’re looking at, the inputs that go into intrinsic value are slightly different.

As a broad guide we use DCF analysis most frequently. We also measure price earnings (PE) ratios – compared to both historical data, and the broader industry.

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3. Make an effort to really understand the company you’re investing in

These days there’s plenty of information at your fingertips.

But if everything you know about a company can be searched on Google or a quick round on Commsec, then chances are you don’t have an advantage.

Remember, markets aren’t always efficient, otherwise people like me wouldn’t have a job.

The goal is to find that information advantage, and it’s not as hard as people think.

Here’s an example that I discussed on a podcast recently.

It was mid-2020 and Melbourne was in lockdown. I was in the home office and my kids were being home-schooled.

The world looked fairly bleak and I was assessing the prospects for National Tyre & Wheel Ltd (ASX:NTD), which we owned.

The stock was down substantially. I was reading every piece of research I could find to assess the impact of COVID-19 on tyre and wheel companies.

Based on NTD’s valuation, the market was pricing an earnings downgrade of 60-80%.

Then my daughter asked for help on a school assignment: What is the impact of the pandemic on local businesses?

I had a lightbulb moment – we’d kill two birds with one stone.

We picked up the phone and called tyre and wheel companies in NSW and Victoria. I spoke with six companies, and she spoke with two.

Now I’m fairly sure the companies that spoke to my daughter were much kinder and gave her more information than I got, but the feedback was there for anyone who wanted to make a phone call.

They all said it’s the worst disruption they’d ever faced, and earnings were down by around 30%.

Recall though; the market was pricing earnings to fall by well over 50%. So we doubled down.

The Collins St Value Fund increased its stake in NTW at 28c a share. Fast forward to today and the stock trades at over $1.

I think most investors would rather sit behind a screen and read a broker report rather than doing their own primary research.

It might be a bit embarrassing — get over it. Remind yourself there’s a bucket of money to make if you’re prepared to get comfortable being uncomfortable.
 

4. The conviction trade

Once you’ve gone to the effort of finding a wonderful company that looks undervalued, invest with conviction.

You’ve spent the time researching. You may have spent time on the road speaking to people or trying out their products.

Now take advantage — buy enough shares so the investment can have a positive impact.

At Collins St, if we like a company then we’re going to allocate a material percentage of our investable capital in that particular stock.

Act with conviction and invest enough capital to really move the needle on your portfolio.
 

5. Turn off the noise

When I first started investing in equities, one of the main challenges was that information wasn’t so easy to come by.

Now, there’s almost too much of it.

Once you’ve done your research and decided to invest, turn away from the noise and the chat rooms.

If you’ve been diligent and haven’t skipped any steps, then unless there’s additional news you should just relax and let the profits play out.

Oh, and remember — it almost always takes longer than you expect for it to do so.

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